An often overlooked part of trading is choosing the right markets to trade. Most traders do not pay too much attention to the mix of markets they follow. New traders are sometimes at a loss as to how many markets or sectors to trade and which ones to follow. It is a common misconception that you need to follow a lot of stocks to be a successful trader. This is not true. For most traders, choosing six to eight stocks to follow should be adequate. It is important to allow some diversification among the markets you follow however, so as to allow for the maximum number of trading opportunities.
You would not want to choose all power stocks to follow, or all grains if trading in commodities. By taking one or two picks from each category you should have enough of a cross section to catch most of the opportunities within that category.
7.4.1 Importance of discipline in trading
Overtrading is the biggest reason for failure of people in trading While there is no definitive rule for how many times you can (or should) trade, new traders should be especially cautious not to overtrade. Industry statistics show that 90% of new traders will not make it to their first anniversary. Why? Overtrading is one factor that has been identified as a definite ‘no-no’. So why do traders overtrade?
• Traders overtrade because of the reason that they are hooked on the rush that comes form being in the markets
• Some overtrade because they feel they that will miss a golden opportunity if they don’t trade.
• Some traders overtrade because their system does not have specific enough entry criteria to keep them out of bad trades.
• Many traders in a hurry to start trading don’t wait for a good opportunity but start trading with a first trade that looks good.
• Some traders overtrade because they feel that the more they trade, more the money they will be able to make.
This is the real secret in making more money with your trades: learning to identify the best market opportunities.
There are three positions that a trade can have in the market namely: long, short or fl at. But the trader’s don’t realize this. Many of them feel that they have to be constantly in the market for which they need to acquire either a long position or a short position. It is equally important to recognize that the third option, being fl at, is as legitimate a position as the first two. Being fl at allows you to watch the market set up so that you can best take advantage of the market when it is ready. This is what traders mean when they tell you *not to chase the markets.*
It is important to learn to wait for the markets and let them come to you. Then your job as a trader is to be ready for them.
Buy, sell, or stand aside. Just make sure it’s the right decision at the time.
There are many methods to build superior trading habits. Good trading habits will make trading a part of routine, rather than a task. Getting in the habit of doing everything exactly to plan will boost trading profits, marking one more step in the path to financial freedom.
1. Trading discipline – One’s own trading plan is very important to success. It should be followed strictly. Emotions have no place in trading and it could easily lead to losing of money. Proven techniques and strategies should not be edited for any reason; follow the plan and let it work for you.
2. Understanding risk – Difference between gambling and investing is what is called as managing risk. Profitable traders can quickly calculate how much of a drawdown they are
willing to incur before cutting a position. It is important to have a plan for pruning losses and minimizing the damage of drawdown.
3. Stick to your niche – Niche trading is considered to be the best strategy to remain profitable. Sticking to an area in which one specializes is the best way to minimize losses. If one is best in high volume trading, then only trade during periods of high volume. Finding your trading niche will help you to become more a more effi cient trader.
4. Look at every time frame – Even when trading short 5 minute ticks, it is important to evaluate all timeframes for market data. It just might happen that a 100 day moving average is acting to support your position. You’ll never know this unless you take the time to study all timeframes rather than just a few. Long term trends can and do impact short term trading positions. Day traders are more susceptible to trading in only one timeframe because of how time-sensitive their investments are. Swing traders are probably used to checking multiple timeframes for entry points.
5. Trading is affected by emotion – It is difficult to get away with the trading. Holding open positions can increase the amount of stress. Day traders should try and limit the
exposure and keep the stress at lower level.
6. Trade as your capital allows –High levels of margins can be easily exceeded by the day traders that greatly exceeds there trading capital. Exceeding the credit limit can be very dangerous and it can accumulate losses as fast as gains. Momentum trading with many different entry points can end up in costly mistakes if your account becomes overextended.
Even the best traders in the market have trading sessions that are less than optimal. Human nature dictates that we make mistakes, and trading the stock market is no exception. Subsequently, there is always room for improvement, whether you are a novice trader or a seasoned veteran.
1. Stick to your Guns – Running from the market is no solution. One should try to stay in the game and earn profits. Sticking to the trading plan and enacting trading discipline are the best ways to produce profits.
2. Set stop losses and take profits – The most profitable trading is one in which we “Set and forget”. Once should remember to place exit along with placement of trade. Technical analysis will tell you the best price or selling (near resistance) and the best place for buying (near support). Support and resistance points are the best places to put limit orders.
3. Don’t watch minute to minute – The minute to minute movements should be avoided by the traders. It is difficult to have a potentially profitable trade after having minute to minute movements. There is no reason to get out of a trade for quick profits if you’re in for the long haul. Small ups and downs create temporary stress and can reduce swing traders to day traders. Niche trading works because you’re specialized in your own area.
1. Eliminate high probability trading – You wouldn’t expect to make consistent profits at the roulette wheel, and you shouldn’t do the same with your investments. The active,
professional trader only takes quality trades opposed to quantity of trades.
2. Accept that full-time day trading is rough – It is very difficult to trade on a full time daily basis. The ups and downs of full-time day trading are very stressful. Stress will make you think differently and trade differently. A professional trader will need to find ways to vent their frustrations as bad days do happen to the best of traders.
3. Don’t get attached –one should not be too attached with the stock. Investor should be ready to dump it off when the price is right.
4. Pick swing traders or day traders – Know exactly what kind of trader you want to be. It is difficult to be very good at swing trading while following short term movements of day trading. Define what kind of strategy you want to follow and stick with it.
5. Talk to other traders – Communicate with other traders and share their experiences. Aim should be to get trading down to a point where it comes naturally to you.